Savings rates on small savings could come off by 25 to 50 basis points (bps) over the next few days as the finance ministry comes up with its new formulation to reset rates on a quarterly basis instead of, as now, a yearly basis. As of now, the ministry will restrict these cuts to small savings schemes that have a tenure of less than five years. This means the popular National Savings Certificate (NSC) will remain unaffected.
It is not clear if the government will lower the spread on small savings. Right now, spreads are 25 bps for all instruments over the corresponding government paper.
While the finance ministry will extend this principle to schemes of more than five years later, the proposal at present is to cut rates on only those schemes that compete with short-term deposits of banks.
Once these rates are announced, expect bank deposit and lending rates to also fall. While the Reserve Bank of India has been cutting rates, the banks have passed on less than half of the cuts on account of high rates on small savings schemes. According to the banks, if they cut rates, a large part of their deposits would flow into small savings schemes. Also, small savings get various tax benefits as opposed to the interest on bank deposits. Currently, the finance ministry has no plans to take away these tax benefits.
For example, one-year postal deposit offers 8.4 per cent where as State Bank of India offers 7.25 per cent for deposits of the same tenure (7.5 per cent for senior citizens). For the girl child’s welfare, the Sukanya Samriddhi Account Scheme offers 9.2 per cent interest for a period up to 10 years while SBI offers only 7 per cent on term deposits of 5-10 years (7.25 per cent for senior citizens).
Even though interest rate is reset every year (that would be applicable to incremental deposits), small savings rate is fixed for the entire tenure of a deposit booked at a particular time. The cumulative corpus of National Small Savings Fund is projected to rise to Rs 9.59 lakh crore after accretion of Rs 52,000 crore in 2015-16.